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26 Unsettling Truths About Social Security

Absolutely everything you need to know about Social Security.

The Social Security program is turning 80 this year, and though most Americans won't commemorate this milestone, a huge chunk of them -- 57 million -- will benefit from it by more than $1,200 a month.

The future of the Social Security program has been much debated, especially as a new Congress looks to approve or deny a budget that would decide the immediate future of disability payments. We can expect full saturation of headlines, a fair amount of politicking, and, ultimately, a sneak peek into what this program will look like in the coming decades.

Social Security was created in the wake of one financial crisis; nearly a century later, as the country limps toward recovery from another crisis, policymakers are making decisions about the program's future that have real-dollar effects on just about everyone who plans on living to their mid-sixties.

That makes it a scary time for the millions of Americans approaching retirement -- and the millions who are just starting to fund the Social Security system. It's also well past time to learn what you can expect to get out of Social Security in the next 80 years and how you can prepare to supplement that if it's not enough.

1. At its current pace, Social Security's trust funds will run out by 2033Since it was established in 1935, Social Security has been a "pay as you go" system -- essentially, a higher-stakes version of the "take a penny, leave a penny" tray. So the checks that retirees and other Social Security beneficiaries get are primarily funded by taxes that are taken from the paychecks of about 96% of workers (and matched by their employers), according to The Washington Post.

For the most part, up until 2010 Social Security took in more from taxes than it paid out in benefits, investing the surplus in Treasury securities to earn some interest. That practice put about $2.8 trillion dollars in the Social Security trust funds.

Unfortunately, those funds are no longer just an emergency buffer. For the last five years, there's been a cash-flow deficit -- it's currently about $75 billion a year, a number that's expected to rise precipitously by the end of this decade.

At this rate, according to estimates in the 2014 Social Security Trustees Report, the trust funds will become insolvent -- i.e., run out -- by 2033.

2. Social Security's Disability Insurance Trust Fund will run out much sooner than thatThe Social Security program is financed by two trust funds -- one for retirement and survivors benefits, the other for disability benefits. The latter is slated to run dry much sooner, by 2016, at which point disability benefits will have to be cut by 19%, according to The Wall Street Journal.

President Obama's most recent budget proposed a 0.9% reallocation of funds from the retirement fund to the disability fund to prevent this from happening -- a "robbing Paul to pay Peter" method that Social Security has done 11 times since 1994. Even if this budget passes a Republican-controlled Congress, however, it would only be a temporary fix -- one that would shorten the retirement trust fund's runway by another valuable year.

3. People are more reliant on Social Security than everBaby boomers, many of whom are now in or near retirement, are chronically underprepared for retirement. Not even half of all boomer households between 55 and 64 have any retirement savings, according to The New York Times, and the recent financial crisis wreaked havoc on the accounts of those who did plan ahead. Many boomers still have mortgages, debt, and HELOCs, and some are unemployed.

Even before the recession, our retirement savings habits were lacking. Defined-benefit pensions are becoming more obsolete, with only 22% of Fortune 500 companies currently offering them (compared to 60% in 1998).

All told, today's retirees are leaning hard on their Social Security payments, which in December 2014 averaged $1,282.27 a month, according to the Social Security Administration. According to The New York Times, for the majority of retirees, who earn $32,600 or less annually, Social Security makes up at least two-thirds of their income.

4. The ratio of taxes to payout is getting smallerA 2012 study from the Urban Institute found that a dual-income couple in 1960 making an average salary would pay about $26,000 into the Social Security system in their lifetimes and ultimately take out $269,000 in benefits -- meaning their benefits were roughly eight times what they were taxed.

In 2010, that couple would have paid $523,000 in lifetime taxes but would earn just $877,000 in lifetime benefits -- only a third more than they put in.

5. All the boomers are retiring at onceOne of the reasons for Social Security's continuing deficits is the influx of retirees, which is putting strain on an already strained system. Every month, 250,000 more baby boomers turn 65, with many dropping out of the workforce. In 2010, 10% of boomers were retired; in 2014, that number had jumped to 17%.

6. People are living longerSocial Security depends on the ratio of tax-paying workers to benefit-receiving retirees. That ratio has to be front-loaded for there to be any kind of surplus. In 2011, there were 2.9 workers for every retiree, and the SSA estimates that figure will shrink to just 2-to-1 by 2035.

Part of this is thanks to the fact that people are living longer. Whereas just 12% of the population was 65 or older in the middle of the last decade, by 2080 retirement-eligible Americans will make up 23% of the population.

7. People are having fewer childrenAt the same time, decreased fertility rates mean fewer Americans are entering the workforce to replace retiring boomers. According to the SSA's chief actuary, Steve Goss, this is the primary threat to Social Security. CBS News reports the U.S. birth rate has declined more than 30% since the 1960s, which means the number of Americans paying into the Social Security system is plummeting just as its number of beneficiaries is booming.

8. Social Security benefits are growing faster than the economyA low birthrate and increasing number of retirees also means that the cost of Social Security is quickly becoming a larger percentage of the nation's gross domestic product. The U.S. economy, still in recovery mode, isn't expanding fast enough to keep up with the increasing financial needs of the Social Security system.

9. The system is still paying for the first beneficiariesBecause the system wasn't pre-funded, the first recipients of Social Security put in a lot less and got a lot more out; that gap is still being subsidized by today's workers.

10. Income inequality is further eroding Social SecurityA report released in February 2015 from the Center for American Progress, a slightly left-of-center public policy and research organization, found that the increasing income gap is putting less money into the Social Security system.

Here's why: The payroll tax that funds Social Security applies to income of $118,500 or less -- this cap changes year to year. But in the last several decades, income has disproportionately increased for the rich and remained more stagnant for lower brackets. In 1983, 10% of the nation's income escaped the Social Security tax, whereas 17% is not taxed today.

With higher wages exempt from the tax, the system is losing out on money at a time when it needs money the most. What's more, a lot of the money that the highest earners make doesn't even show up on a paycheck; earnings from investments and stocks, for example, are subject to the capital gains tax.

Ultimately, according to the report, "upward redistribution of income in the United States has meant that income has shifted away from the workers whose full earnings are taxed and toward high-income workers whose additional dollars are exempt."

11. Social Security benefits could get cutSo what will be the consequences if the Social Security trust funds become insolvent?

Well, the Social Security program won't cease to exist. Taxes will still get taken out and benefits will still get paid, although they could get cut.

Recipients of disability payments could see a 20% cut as soon as 2016, according to The New York Times. Combined benefits, from both the disability and retirement trust funds, would be cut by about 25% if the funds run out as expected by 2033. That means retirees would be receiving checks that are about 75% of what they're used to.

12. Social Security taxes could be raisedTo cover the gap between taxes and benefits -- and to prevent a possible benefit cut -- the SSA might have to increase the tax that's taken out of workers' paychecks.

The current tax rate is 6.2% -- it hasn't budged since 1990. The New York Times argues that an increase of just 1% could cut the funding gap in by half in 20 years.

13. The retirement age could be movedIn the 20 years leading up to 1983, the full retirement age to receive Social Security was gradually increased from 65 to 67. Since then, some politicians and committees (like the Simpson-Bowles Commission in 2010) have argued that the threshold should be moved again to 69 to keep up with increased life expectancies.

The flip side, though, is that while Americans are living longer in general, the life expectancy for workers in physically demanding jobs has stayed the same -- and the same goes for racial minorities. Moving the retirement age, then, would have unequal benefits.

14. Social Security's trust funds are invested in low-yield securitiesWhereas compounding interest can work wonders for a 401(k) invested primarily in stocks, the Social Security trust funds are invested in Treasury securities, which are much safer than the market but yield significantly less.

15. But investing a portion in corporate securities could be riskyThere would be a lot of obstacles to putting those trusts in higher-earning vehicles, though. For one, many are queasy about putting government money in private corporations, where it could be depleted by fees and knocked around by the volatility of the market. What's more, because the Social Security Administration was able to loan out its surplus to fund other government programs (receiving the securities in exchange), the government was able to keep the national debt lower.

16. It's not politically convenient to fix Social Security right nowGranted, any time a president and the sitting Congress come from different sides of the aisle, it's difficult to make any sort of political maneuvers. But as 2015 begins, the new Congress is just settling in -- and has already begun to tussle with the president over a budget that includes a change to the Disability Insurance Trust Fund. These (and future) fights will only become more heated as 2016, an election year, approaches.

17. The Social Security Administration is understaffedAs it faces budget cuts and more of its employees near retirement age, the Social Security Administration is, as acting commissioner Carolyn Colvin told Obama in a March report, stretched far too thin.

"Our service and stewardship efforts [have] deteriorated," Colvin wrote. "In fiscal year 2013, the public had to wait longer for a decision on their disability claim, to talk to a representative on our national 800 number, and to schedule an appointment in our field offices."

Three out of every five SSA employees will be eligible for retirement by 2022. The administration has already lost 11,000 employees -- 12% of its workforce -- in the last three years.

18. It's also losing field offices left and rightThe SSA is also facing widespread office closures. According to The Wall Street Journal, 44 field offices have been consolidated, 503 mobile service stations have been shuttered, and plans to open eight hearing offices and one call center have been delayed.

19. Wait times are increasing at the SSA's 800 numberOne result of understaffing a much longer wait to talk to a real, live SSA representative on the phone. According to a report released by the SSA, anyone using Social Security's 800 number will be getting a busy signal about 14% of the time (up from 11% in 2011).

Call wait times are also up, with the average at about 17 minutes -- that's double the wait time in 2012.

20. The SSA has already spent $300 million in a failed attempt to update its computer systemsIn 2008, the SSA decided to overhaul 54 of its outdated computer systems, which process disability claims. This was a project the administration envisioned would take about two to three years, ultimately letting SSA employees nationwide file, process and track claims.

Six years and $288 million later, the system still isn't up and running.

21. Most people don't know how Social Security even worksIn 2010, the Financial Literacy Center asked Americans to grade themselves on how well they know the rules and requirements of claiming Social Security benefits. Only 10% of respondents gave themselves an "A," while more than double that (23%) thought they deserved a failing grade.

The survey also asked seven questions to judge how knowledgeable the respondents actually were, and the results were depressing: Only 4% earned an "A," while more than half received a "D" or "F."

These results jibe with a more recent eight-question quiz on crucial Social Security rules conducted by Financial Engines: 5% got full marks, while 45% missed three or more of the eight questions.

22. People aren't working in early retirement -- and they should beSo what are people so misinformed about?

For one, there's the complicated "earnings test," which can reduce the benefits of Americans who are under their full retirement age, working, and collecting Social Security at the same time. For every $2 these recipients earn above an annual limit, their benefit is reduced by $1. This keeps many Americans from trying to earn extra income in early retirement.

The annual income threshold for 2014 is $15,480, so if you worked and received an income last year, half of the money you earned above that threshold will be deducted from your Social Security benefits. What most people don't know, however, is that the SSA will increase your future benefits after you hit retirement age to make up for what you lost.

The earnings test "should not be a disincentive to work," Andrew Biggs, a former deputy commissioner at the SSA, told The Wall Street Journal. "Over your lifetime, your total benefits will come out the same."

23. People are losing hundreds of dollars a month by collecting Social Security too earlyAnother important decision all future retirees will have to make is when to collect Social Security.

Americans who delay collecting their first benefits -- if they can -- gain a huge edge in retirement. For example, if you start collecting benefits at 70, versus 62, your monthly payment will be 76% higher. Most financial advisors recommend trying to capitalize on this increase. A couple who optimizes their benefits could see lifetime gains in excess of $250,000, according to Forbes.

Unfortunately, according to Financial Engines' survey, only 40% of respondents know the percentage increase in monthly benefits they can reap by delaying benefits for at least two years. That's a large chunk of retirees who could be missing out on tens of thousands of dollars in benefits -- all thanks to timing.

24. People are lowering their benefits by not working for 35 yearsAnother easy way to slash the amount of Social Security you get is to not work for at least 35 years. That's because the SSA calculates your benefits based on the 35 years in which you earned the most income. If you've only worked, say, 31 years, then those remaining four years are calculated as zeroes, which will cause your retirement benefit to dip.

Unfortunately, many people don't realize that continuing to work -- even part-time -- is a really simple way to raise your Social Security benefits.

25. The SSA won't tell you if you're leaving benefits on the tableDon't expect the Social Security Administration to go out of its way to inform you of benefits you could be taking but aren't, be they spousal, disability, survivors, or otherwise. It's up to individual retirees to use software, advisors, the Internet, and other resources to make sure they're not leaving any money on the table. Further, the SSA does not retroactively pay out benefits you've missed (perhaps within the last six months, but that's it). Do your due diligence to make sure you're not losing out on thousands of dollars that could be padding a comfortable retirement.

26. More beneficiaries will owe taxes on their benefitsThere's an annual income threshold above which Social Security benefits are taxed, and this cap has never been moved to account for inflation. The cap is typically $32,000 for couples and $25,000 for individual beneficiaries. Because of this, it's becoming more likely that you'll owe taxes on your Social Security benefits by the time you receive them.

The New York Times reports that just 10% of beneficiaries had to pay taxes on their Social Security in 1984, when the tax threshold was instituted; it's estimated that by 2030, more than half of Social Security recipients will be taxed on some or all of their benefits.

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